Building a custom home or completing a major renovation is one of the biggest and most exciting financial projects most people ever take on. But the financing side of construction can feel complicated, intimidating, and very different from a traditional mortgage.
The good news? Once you understand how the construction loan process works, it becomes far more predictable and manageable. This guide walks you through the entire process step-by-step—from early planning to final completion—so you know what to expect, how timelines typically work, and how to avoid the most common (and expensive) pitfalls.
Step 1: Pre-Qualification and Initial Planning
The process starts well before permits are pulled or dirt is moved. At this stage we look at your income, assets, credit profile, and your estimated project budget. We also discuss whether you already own the lot or plan to purchase one. The goal is simple: confirm a realistic project range and structure before you spend significant time and money on plans, engineering, and contractor negotiations.
Step 2: Plans, Specifications, and a Real Budget
Before a construction loan can be approved, the lender needs a clear and detailed picture of what’s being built. This typically includes architectural plans, specifications (materials, finishes, systems), and a line-item construction budget from your builder. The more complete and realistic these items are, the smoother underwriting will be—and the fewer surprises you’ll face mid-build.
Step 3: Builder Approval (Yes, the Builder Matters)
Construction loans involve approving both the borrower and the builder. Lenders look at licensing, insurance, experience with similar projects, and a track record of completing builds. This protects the borrower, the lender, and the project.
Step 4: The “As-Completed” Appraisal
Instead of appraising what exists today, the appraiser evaluates what the home will be worth once completed based on the plans, specs, and budget. This appraisal is a key factor in determining the maximum loan amount and your required cash/equity contribution.
Step 5: Final Loan Approval and Closing
Once the plans, budget, builder, and appraisal are approved, the loan goes through final underwriting. At closing, the construction loan funds (and may pay off an existing lot loan, if applicable), and the construction phase can begin. Many borrowers choose a construction-to-permanent (one-time close) structure.
Step 6: Construction Phase and the Draw Process
Construction funds are not disbursed all at once. Instead, they are released in draws as work is completed. A typical draw process looks like this: the builder completes a phase of work, an inspection verifies progress, and the lender releases funds to pay for that completed work.
Step 7: Change Orders, Inspections, and Contingency Reserves
Surprises happen in construction—material price changes, site issues, code adjustments, and owner changes. That’s why lenders require contingency reserves (often 5–10% of construction costs).
Step 8: Completion and Conversion to Permanent Loan
When construction is complete, a final inspection is performed, a certificate of occupancy is issued, and the loan converts to a long-term mortgage (if structured as construction-to-perm).
Typical Timeline
Planning/approvals: 1–3 months. Construction: 6–12+ months. Total: 9–18 months is common.
Bottom Line
A construction loan is more than a mortgage—it’s a financing and control system designed to keep your build organized, funded appropriately, and protected from avoidable risk.